Ebook prices aren’t dropping faster because they weren’t too high before

In April, the Department of Justice sued Apple and five book publishers for allegedly colluding to fix ebook prices. Eight months later, the DOJ has settled with four of the five publishers. The settlement allows retailers to discount settling publishers’ ebooks with just a couple of restrictions, so many people expected it would lead to much lower ebook prices.

But, as David Streitfeld notes in the New York Times , that hasn’t happened so far. “Prices have selectively fallen but not as broadly or drastically as anticipated,” Streitfeld writes. “The $10 floor that publishers fought so hard to maintain for popular new novels is largely intact.” Streitfeld attributes this to two factors: The growth rate of ebooks isn’t as rapid as it once was, and e-readers are getting so cheap that Amazon can’t afford to lose money on content as well as devices.

I’d offer some totally different explanations.

Ebook prices aren’t dropping faster because they weren’t too high before

A fact that often gets lost in the ebook pricing debate is that most ebooks never cost $9.99 in the first place. Between 2007 and January 2010, when Amazon charged that price for New York Times bestsellers, very few people owned e-readers and Amazon had no competition from other ebook retailers. I’ve written about this more here, but the point is that publishers’ adoption of agency pricing happened as the ebook market was taking off, and was in response to those market changes.

Under agency pricing, publishers sold most frontlist ebooks at $12.99 to $14.99, but priced plenty of older ebooks a lot lower. The pricing strategy developed as the ebook market itself changed. And those prices are still working for the market as it is now. We’ve seen that readers are happy — or at least willing — to pay for hot new ebooks.

Publishers still have power over ebook prices

The settling publishers have not switched back to a wholesale model for ebooks, in which they set a suggested price and the retailer buys the ebooks at a discount (usually 50 percent) and then sells them for whatever price it wants. Rather, publishers are using a modified form of agency: They set an ebook’s list price and pay the retailer a commission (Before the settlement went through, that commission was 30 percent; we don’t know what the new retailer contracts dictate, but the commission is likely still around 30 percent.) In addition, publishers are now free from Apple’s price bands, which tied ebook price directly to print book list price, so if a publisher wants to raise an ebook’s list price — from, say, $12.99 to $16.99 — it can. A retailer who wants to discount that book to $9.99 will then lose even more money.

This dynamic may keep both ebook prices stable. Publishers can increase their ebook prices, but if they raise them beyond a certain point, they risk losing sales if the retailer doesn’t discount. At the same time, retailers who discount ebooks too heavily may see the publisher respond by raising the ebooks’ list price, causing the retailer to lose even more money by continuing the discount.

Kindle has a lot more competition now

Back when Amazon priced all New York Times bestsellers at $9.99, it was the only player in the game. Streitfeld writes as if Amazon is the only retailer out there, but it now has competition from Barnes & Noble’s Nook, Apple’s iBookstore, Kobo and Google. These retailers have all shown themselves willing to match Amazon’s price drops on ebooks. The prices aren’t always exactly the same across stores, but they are at least close enough that there is little incentive to switch retailers if you’re already using a platform you like.

Streitfeld does note that “it is possible that Amazon, which controls about 60 percent of the e-book market, is merely holding back with price cuts for the right moment.” The same is for any of the other retailers selling ebooks. A retailer simply may not see much incentive to drop ebook prices by a dollar or two if a) people are already buying those ebooks through them at the higher price; b) other retailers are likely to match the discount and c) the slightly lower price won’t convert many new buyers.